Economic Review And Outlook Brian Cary Manager of Forecasting, Archives & Research Salt River Project Arizona Financial Professionals Association June 11, 2014

June 2014: Economic Review United States: The U.S. economy slowed in early 2014 – due in part to severe winter weather – but recent statistics reflected stronger growth in the second quarter The job market created jobs at a stronger pace while the unemployment rate trended downward The impact on the global and U.S. economies from the turmoil in Ukraine remains uncertain Metropolitan Phoenix: Employment gains in financial activities, education and health services were offset somewhat by job losses in manufacturing Phoenix area housing prices have leveled off while multi- family construction accelerated 2 AFPA Meeting, 06/11/2014, B. Cary

IMF Predicts Stronger Global Economic Growth World Economic Output – Spring 2014 Forecast Percent Change U.S. economic growth is projected to improve gradually Europe has improved but forecasted growth remains weak China and India are expected to lead the global economy Source: International Monetary Fund 06/11/2014 AFPA Meeting, B. Cary 3

U.S. Economy Contracted For The First Time In Three Years U.S. Gross Domestic Product (GDP) Growth (seasonally adjusted annual rate, 2009 dollars) Annual Growth Rate (%) Q GDP declined (1.0)% (annualized) — down from 2.6% growth in Q Personal consumption spending increased at a 3.1% annual rate — down from 3.3% in Q Decrease was driven primarily by reduced inventories and exports Sources: U.S. Bureau of Economic Analysis; Moody’s Analytics Forecast /11/2014 AFPA Meeting, B. Cary

$ Billions U.S. Household Net Worth Reaches New Record High First Quarter 1986 – First Quarter 2014 (non-seasonally adjusted basis) Source: Board of Governors of the Federal Reserve System Household net worth increased with improved home prices, more jobs and higher stock prices Grew 2.0% from the fourth quarter 2013 – reached $81.8 trillion 5 06/11/2014 AFPA Meeting, B. Cary

6 U.S. Stock Prices Hit Record Levels S&P 500 Index and Dow Jones Industrial Average Last Day Of The Month Closing Price S & P 500 DJIA Source: Standard & Poor’s and Moody’s Analytics In May, the S & P 500 index closed 18.0% higher than a year ago The closing price of the Dow Jones was 10.6% higher than last year

Percent Long-Term Interest Rates May Be On The Rise Again Monthly Averages Through May 2014 Source: Board of Governors of the Federal Reserve System Although interest rates began moving upward, they remain relatively low The Fed continues to “taper” its bond purchases 7 06/11/2014 AFPA Meeting, B. Cary

Percent Change Source: U.S. Bureau of Labor Statistics U.S. Consumer Prices: Still Stable Year-Over-Year Percent Change CPI rose 0.3% in April — up 2.0% on a year-over-year basis Core CPI maintained its 0.2% pace from last month — up 1.8% from a year ago Higher food and gasoline costs led to higher consumer prices 8 06/11/2014 AFPA Meeting, B. Cary

U.S. Employment Returns To Pre-Recession Levels Total Non-Farm Employment – Net Change From Prior Month & Unemployment Rate Source: U.S. Bureau of Labor Statistics Thousands Unemployment Rate 217,000 jobs were added in May; the jobless rate was unchanged at 6.3% Professional/business services and health care posted the largest increases March and April data revisions showed 6,000 fewer jobs than originally reported 9 06/11/2014 AFPA Meeting, B. Cary

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Employment Trends Index Strengthens The Conference Board Employment Trends Index (ETI) Correlated with employment & provides a leading indication of employment’s direction Consists of 8 labor market indicators, with 7 indicators showing positive results Index signaling continued employment growth in the months ahead Source: The Conference Board 1996 = /11/2014 AFPA Meeting, B. Cary

ISM Surveys Show The Economy Is Still Expanding Institute for Supply Management Manufacturing Index Index Source: ISM Manufacturing index was 55.4 in May — up for the fifth consecutive month New orders index rose 1.8 points from the previous month Non-manufacturing index was 56.3 in May– up 1.1 points from April 12 06/11/2014 AFPA Meeting, B. Cary

Sales in the Americas dropped 1.6% from last month but climbed 13.6% from last year Worldwide billings were up 0.7% from the previous month & increased 11.5% from last year Demand for electronics & cloud-based computing are expected to increase semiconductor growth $ Billions Global Semiconductor Sales Increased Steadily Semiconductor Sales (3-month moving average) $ Billions Source: Semiconductor Industry Association 13 06/11/2014 AFPA Meeting, B. Cary

Semiconductor Orders Dipped Slightly U.S. Semiconductor Book-to-Bill Ratio Ratio Book-to-bill ratio = new orders divided by current shipments Ratio was 1.03 in April — ratio above 1.0 for seventh consecutive month Demand for mobile devices and servers for cloud computing are expected to drive steady semiconductor growth Source: SEMI 14 06/11/2014 AFPA Meeting, B. Cary

Leading Index Signals Continued Economic Growth U.S. Index Of Leading Economic Indicators — Net Change From Prior Month Index is designed to signal the economy’s performance in the next 6-12 months LEI increased 0.4% in April – up 11 of the last 12 months Higher interest rate spread and rising building permits led to the increase Percent Change Source: The Conference Board 15 06/11/2014 AFPA Meeting, B. Cary

Confidence Grows With A More Favorable Employment Outlook U.S. Consumer Confidence Index Index In May, the index rose to 83.0 — April’s index level was revised downward to 81.7 Consumers were more optimistic in May about current and future business conditions Labor market expectations improved from April as more respondents felt jobs were plentiful Source: The Conference Board 16 06/11/2014 AFPA Meeting, B. Cary

Greater Phoenix Job Growth Remains Steady Metropolitan Phoenix Non-Farm Employment Net Change From A Year Ago And Unemployment Rate Thousands Source: Arizona Office of Employment & Population Statistics Non-farm employment grew 2.2% from a year ago in April (39,100 positions) Gains were led by the financial, education and health services sectors Manufacturing was down by 700 jobs from a year ago Unemployment Rate 17 06/11/2014 AFPA Meeting, B. Cary

Number of Months After Peak Employment (seasonally adjusted) Percent Change From Peak Employment 18 06/11/2014 AFPA Meeting, B. Cary

Unemployment Insurance Claims Fell Over The Year Arizona Total Unemployment Insurance Claims 4-week moving average Total Claims Source: U.S. Department of Labor Total weekly UI claims were 1.1% lower than a year ago on a moving average basis 06/11/2014 AFPA Meeting, B. Cary 19

Unemployment Rate For Arizona Counties Unemployment Rate, N.S.A. (April 2014) Source: Arizona Department of Administration 20 06/11/2014 AFPA Meeting, B. Cary

State Individual Income Tax Receipts Dipped in April Individual Income Tax Collections (12-month moving average) Individual income tax collections were 0.1% lower than a year ago on a moving average basis April withholding tax collections were 0.2% higher than a year ago Source: Arizona Joint Legislative Budget Committee (JLBC) $ Millions Percent Change 21 06/11/2014 AFPA Meeting, B. Cary

Arizonans More Confident About Future Economic Conditions Arizona Consumer Confidence Index (April 2014) 1985=100 Index increased from 68.9 to 75.1 in the latest survey – its highest level in six years Both consumers’ current assessment and expectations for the future improved Source: Behavior Research Center 22 06/11/2014 AFPA Meeting, B. Cary

PriceSales Volume Phoenix Area Home Prices: Leveling Off Resale and New Home Median Sales Prices In Maricopa County 6-month moving average Sources: The Cromford Report; AMLS Median prices rose 14.2% from last year but were unchanged from the prior month The number of homes sold in April fell 13.3% over the year but grew 2.9% from last month 23 06/11/2014 AFPA Meeting, B. Cary

Source: Standard & Poor’s Phoenix Area Home Prices: Leveling Off Standard & Poor’s / Case-Shiller Home Price Index Jan 2000 = 100 Phoenix area: up +11.1% from last year, down (36.3)% from the June 2006 peak Phoenix area prices posted a slight monthly gain for the first time in three months U.S. Composite: up +12.4% from a year ago, down (19.2)% from the July 2006 peak 24 06/11/2014 AFPA Meeting, B. Cary

25 Source: Federal Housing Finance Agency U.S. and Arizona Home Prices Improved In The Last Two Years Federal Housing Finance Agency House Price Index – Purchase Only Quarterly, seasonally adjusted 1991 = 100 Arizona home prices increased 2.1% over the quarter and 14.7% from a year ago Phoenix area home prices were up 2.0% from last quarter and 16.6% from last year Tucson MSA home prices grew 1.0% from Q and 8.4% from a year ago Prices were up 1.3% from last quarter and 6.6% from last year

Distressed Home Inventories Are Down From The Peak Maricopa County Notices of Trustee Sales and Total Pending NOTS Pending Inventory of properties in foreclosure peaked in December 2009 Total active notices are 91.4% lower than December 2009 peak level Initial notices & total foreclosures pending continue to fall – dropped 44.3% & 47.2% Y-O-Y Source: Information Market 26 06/11/2014 AFPA Meeting, B. Cary

Phoenix New Home Construction Still Sluggish Metropolitan Phoenix Housing Permits (6-month moving average) Single-family permits are at the highest level since July 2013 Growth in total permits decelerated slightly after two consecutive months of strong gains Permits Source: U.S. Census Bureau 27 06/11/2014 AFPA Meeting, B. Cary

Source: U.S. Census Bureau 28 06/11/2014 AFPA Meeting, B. Cary Total Permits Arizona Housing Permits Have Improved From Last Year Arizona, Phoenix MSA and Tucson MSA Total Home Permits 6 — month moving average, not seasonally adjusted Statewide housing permits are up 21.8% from last year on a moving average basis Phoenix permits were up 26.0% from last year & 9.4% from last month on a moving average basis Tucson home permits were down 10.2% on a moving average basis

Commercial RE Vacancies Are Trending Lower Metro Phoenix Office, Industrial And Retail Real Estate Source: CBRE Office vacancy rate declined to 22.1% in Q – net absorption dipped to 253,845 SF Industrial vacancies fell to 11.3%, with net absorption of 1.6 MSF in Q Retail vacancy rate decreased to 10.0% – net absorption was 387,226 SF Vacancy Rate 29 06/11/2014 AFPA Meeting, B. Cary

Phoenix Sky Harbor Passenger Count Reached A Record Level Phoenix Sky Harbor Airport Statistics — Year-Over-Year Percent Change Total passenger traffic climbed 28.0% and total cargo jumped 43.3% from the prior month March marked the busiest month ever with over 4 million passengers Passenger traffic was 3.2% higher over the year & total cargo soared 34.0% from last year % Change Millions Source: Phoenix Sky Harbor Airport 30 06/11/2014 AFPA Meeting, B. Cary

Arizona Highway Traffic Is Gradually Increasing Total Vehicle Miles Driven in Arizona (12-month moving average, % change from year ago) Miles driven (Millions) % Change After climbing in 2010, mileage started declining again in the summer of 2011 Traffic has slowly picked up the pace since October 2012 on a moving average basis Arizona traffic rose 1.2% on a year-over-year moving average basis in March Source: U.S. Department of Transportation 31 06/11/2014 AFPA Meeting, B. Cary

Exports From Arizona To Mexico Are At An All Time High $ Millions % Change Source: International Trade Administration, Global Patterns of a State’s Exports /11/2014 AFPA Meeting, B. Cary

Metropolitan Phoenix Employment Forecast University of Arizona Forecasting Project (May 2014) Percent Change Greater Phoenix employment is expected to increase 3.2% in 2014 (57,400 jobs) Job growth is predicted to improve in 2015 and beyond Source: University of Arizona Forecasting Project, Arizona Office of Employment & Population Statistics 33 06/11/2014 AFPA Meeting, B. Cary

Metropolitan Phoenix Population Forecast University of Arizona Forecasting Project (May 2014) Net Change In Population and Percent Change From A Year Ago Net Change (thousands) Percent Change Source: University of Arizona Forecasting Project Forecast expects steady gains in the near term with stronger growth by 2017 Greater Phoenix predicted to add nearly 68,000 people in /11/2014 AFPA Meeting, B. Cary

Net Change (thousands) Statewide Population Forecast University of Arizona Forecasting Project (May 2014) Net Change In Population 06/11/2014 AFPA Meeting, B. Cary 35 Source: University of Arizona Forecasting Project Arizona predicted to add more than 87,000 people in 2014

Arizona Personal Income Expected To Accelerate In 2014 Arizona, Phoenix MSA and Tucson MSA Personal Income Source: University of Arizona Forecasting Project 36 Personal Income (thousands) Personal income growth is expected to improve this year Growth is expected to pick up from 2015 through /11/2014 AFPA Meeting, B. Cary

37 Source: U.S. Census Bureau, University of Arizona Forecasting Project Arizona Home Building Predicted To Rise In The Next Three Years Arizona, Phoenix MSA and Tucson MSA Total Residential Building Permits Total Permits (thousands) Home permits are expected to accelerate in 2015 across the state, especially in the Phoenix area

Summary and Outlook U.S. economic growth is expected to accelerate this year as household incomes and credit conditions improve Job creation is expected to continue at a solid pace while the unemployment rate should continue its downward trend Home prices in the greater Phoenix area are predicted to remain relatively flat in the months ahead The Arizona job market is projected to post modest gains in 2014 before trending higher in /11/2014 AFPA Meeting, B. Cary